Cloud over Primary dividend policy

A key shareholder in
Primary Health Care
has demanded the company ­revisit its dividend policy as it battles pressures on its pathology business from government health reforms.

The company more than doubled its interim dividend to 15¢ a share and plans to pay a 35¢ full-year dividend.

But
Perpetual
, which holds more than 8 per cent of Primary, is concerned that paying the dividend promised for the full year could be financially irresponsible.

“Given the first-half run rate and the headwinds facing not only Primary but the industry, that dividend forecast looks doubtful," said Perpetual portfolio manager Matt Williams.

Chief executive
Ed Bateman
reiterated the company’s guidance for 15 per cent growth in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2010-11 and 2011-12 at Primary’s half-year results in February,

But Bloomberg consensus estimates are forecasting Primary will book full-year earnings of 33.7¢ per share, below the 35¢ per share Primary is planning to pay and implying a payout ratio of more than 100 per cent.

This could mean that to pay the proposed dividend Primary would have to dip into retained earnings, which stood at $100 million at the end of fiscal 2009.

“It would make prudent sense not to pay any more than the company earnings and more than is prudent," Mr Williams said.

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Primary shares have fallen about 26 per cent since the company ­reported its half-year results in mid-February, and have dropped more than 30 per cent in value so far this year. In mid-April, Dr Bateman sold more than 10 per cent of his holding and struck an option deal.

“I think the managing director trading around the stock in such a manner is poor form and not a good look," Mr Williams said.

Fortis Investment Partners managing director George Clapham said while Dr Bateman had sold stock, “he’s also effectively increased his fully diluted interest in the company through the option deal he’s struck".

“It’s showing he’s positive on the outlook and believes there’s upside in the stock from these levels. Net on net, he’s increased his exposure," he said.

Dr Bateman indicated his plan last year to introduce and raise charges for co-payments and cut bulk billing at medical centres to ­recover revenue lost through the federal government cutting $763 million from pathology funding over four years.